Tax Update 2018, Lancaster CPA

Transcription

1 Tax Update 2018, Lancaster CPA INDIVIDUALS TAX RATES: The Act keeps the seven income tax brackets but lowers tax rates and widens income tax brackets. STANDARD V. ITEMIZED: Many itemized deductions are eliminated and the standard deduction is doubled; Therefore, more people will be taking the standard on their FEDERAL return than before. 1040: Post Card Tax return is comical considering the new 1040 now has 6 supplemental schedules, adding 50+ line items to your tax return. CHILD AND ELDER CARE CREDIT: Child Tax Credit increased from $1,000 to $2,000 per qualifying child. It allows a $500 credit for each non-child dependent (i.e. 17+ yr old child or elderly parent). The credit phaseout is now $400,000 for married tax filers (used to be $110,000). MEDICAL: Deduct medical expenses that exceed 7.5% AGI (up from 10% in 2017) favorable for taxpayers. (IRC 56 and 213). Most taxpayers are unlikely to benefit from this deduction because the Standard Deduction has doubled to $24K for MFJ HOME MORTGAGE INTEREST: Not eliminated, but more restricted. Non-issue for most taxpayers unless you can qualify for a $750,000+ mortgage, not much changes for you. HELOC: You can no longer deduct interest on home equity loans UNLESS they are used to buy, build or substantially improve the taxpayer s home that secures the loan. DEDUCTIONS AFFECTING WORKERS: Eliminated the deduction for miscellaneous expenses you incurred for work-related purposes. CHARITABLE: You can still claim this tax deduction in full (assuming you itemize). So go ahead and donate to your favorite charity. (IRC 170) OBAMACARE PENALTY: The Act repeals the Obamacare tax (i.e. penalty) on those without health insurance in There's still a penalty for being uninsured in

2 BUSINESS Entertainment is no longer a deductible business expense. DEDUCTING ASSETS (Depreciation): New tax bill allows businesses to deduct the cost of most depreciable assets in one year instead of spreading the deduction over several years (i.e. amortizing). QUALIFIED BUSINESS INCOME DEDUCTION 20% FLOW-THROUGH DEDUCTION ON QUALIFIED BUSINESS INCOME (QBI): Allows businesses to reduce their taxable income by 20% Pass-through businesses include sole proprietorships, partnerships, limited liability companies, S corporations, and some real property businesses. WHO QUALIFIES: Qualified trades or businesses include all trades or businesses except those classified as a specified service trade or business (SSTB) A SSTB is a business that provides services in any one of the following business types SSTB is a NON-ISSUE IF your TAXABLE INCOME is under the PHASE OUT limits. CALCULATION: 20% of the lesser of: qualified business income; or taxable income. PHASEOUT: If taxable income exceeds the phaseout figures below, then certain additional thresholds and tests apply $315,000 for Married filing Joint $157,500 Single or MFS SELF-EMPLOYMENT TAX: Because the deduction is taken at the top of 1040 (not taken on Schedule C), it does not reduce self-employment income. MULTIPLE BUSINESSES: Deductible amount for each business is computed separately for each business and netted to reach the combined business income. BUSINESS LOSS: Losses will be netted against profits before considering the 20% flow-through deduction *** Including Rental losses*** If the taxpayer owns multiple qualified businesses and the total combined amount of QBI for all qualified businesses is a net loss for the year, the taxpayer gets no deduction for the current year. Instead, the loss is carried forward as a loss to offset total combined QBI in the next tax year. 2

3 RELY ON VERY COMPETENT CPA: The deduction is very complex. Limitation rules complicate the otherwise exciting deduction..., particularly if any of the following pertains to you: K-1 & PARTNERSHIP WARNING: Many of you file and/or receive partnership and S Corporation returns that include Form K-1. You must make absolutely sure that your Tax Preparer correctly prepares your K-1 since your FLOW THROUGH DEDUCTION (QBDI) depends on the TAX Preparer getting this CORRECT! Net Commission Income (Income -Expenses) $55,000 $55,000 Standard deduction ($6,500) ($12,000) Personal exemptions (1 x $4,150) ($4,150) ($ - 0 -) QBI Deduction (20% x 55,000) ($ - 0 -) ($11,000) Taxable income $44,350 $32,000 Tax before credits Child tax credits Net Tax $6,741 $3,650 Rod Stewart - SINGLE (Realtor SBO, Single, No Kids, Claiming Standard Deduction) $3,091 Marginal Tax Rate 25% 12% 3

4 Kurt & Goldie Hawns - MFJ (Kurt is an employee, Goldie is an SBO, MFJ, 2 kids, Itemized Deductions total $18,000 due to mortgage interest and charitable contributions) Net Commission Income (Income -Expenses) $45,000 $45,000 Salary Income $45,000 $45,000 Standard deduction ($24,000) Itemized deduction ($18,000) Personal exemptions (4 x $4,150) ($16,600) ($ - 0 -) QBI Deduction (20% x 45,000)* ($ - 0 -) ($9,000) Taxable income $55,400 $57,000 Tax before credits $7,358 $6,459 Child tax credits ($2,000) ($4,000) Net Tax $5,358 $2,459 $2,899 Marginal Tax Rate 15% 12% Ross and Rachel - MFJ (Ross is a W-2 employee and Rachel is a SBO Realtor. They are MFJ, 1 kid, Itemized Deductions total $22,000 due to mortgage interest and charitable contributions) Net Commission Income (Income -Expenses) $100,000 $100,000 Salary Income $75,000 $75,000 Standard deduction ($24,000) Itemized deduction ($22,000) Personal exemptions (3 x $4,150) ($12,450) ($ - 0 -) Rental Loss ($10,000) ($10,000) QBI Deduction (20% x (175K-24K) = $30,200) vs ($100K Business - 10K Rental Loss) x 20% = $18K ($ - 0 -) ($18,000) Taxable income $130,550 $123,000 Tax before credits $20,600 $18,939 Child tax credits ($1,000) ($2,000) Net Tax $19,600 $16,939 $2,661 Marginal Tax Rate 4

5 QBI DEDUCTION: RENTAL PROPERTY How to Qualify for the QBI Deduction (20% Flow Through Deduction): Calculation: Trade or Business : Sec 199A(c) requires that the QBI income be earned in a qualified trade or business which is not well defined by the tax law. Sec 162 Trade or Business: Business must be regular, continuous, and substantial Multiple Rental properties are netted together for the 20% QBI deduction. Net Rental Profit: Calculation is simpler; 20% QBI deduction is applied. Net Rental Loss: If the total combined amount of QBI is a net loss for the year, the taxpayer gets no deduction for the current year. Instead, the loss is carried forward as a loss to offset total combined QBI in the next tax year. IRS TIPS The IRS requires that business owners file a Form Misc. by January 31st for every individual or noncorporate LLC that you paid over $600 in the tax year for trade or business services. Failure to file the form could result in a penalty as much as $1,000 per each omitted, late, or incorrect 1099-Misc. The 1099-Misc must be provided to the taxpayer by January 31. The IRS continues to be suspicious of Meals, Mileage, and Travel expenses. LANCASTER CPA We will see clients for tax prep appointments on Mondays, Wednesdays, and Fridays. The remaining days are for uninterrupted tax prep. PORTAL: The ONLY acceptable method for sending and receiving tax documents is via the portal. Your tax returns can be accessed via your portal anytime. 5